Quick hits on CMHC premiums - first in a series

Given the rising costs of real estate here in the GTA, and consistent demand, it's good to understand your options when purchasing a home with less than 20% down.

This is the first in a series of blog posts that will cover some key aspects of Canada Mortgage and Housing Corporation (CMHC) insurance premiums as you step into your home ownership adventure.

I started my mortgage journey in 1997 after putting 5% down on a two bedroom condo in downtown Toronto. Given the minimal down payment, I learned that the mortgage needed to be insured by CMHC and opted for the insurance premiums to be added to my mortgage payments. All good.

Today, it's a little more complicated.

Let's take Sunil and Brenda, a fictional couple who rent a condo near Yonge and Sheppard, but are looking to buy something bigger as their family expands. They earn a household income of $128,000 and have $34,000 set aside for a down payment on a home. Sunil wants to buy now before the spring as he believes prices will rise quickly. Brenda wants to grow their savings for a bigger down payment while they search for the home that's right for them.

Whether they buy now or in the near future, they will need to factor in mortgage insurance premiums into their financing solution. Some nuances to keep in mind:

CMHC will not insure mortgages on homes that are purchased for $1M or more.

The lower the down payment percentage, the higher the mortgage insurance premium. A downpayment between 5% and 9.99% of the purchase price requires a mortgage premium of 3.6%, for example. But increasing the downpayment to, 10% reduces the overall premium charged to 2.4%. Putting 15% down further reduces the premium to 1.8%. The more you pay down, the less you pay out in mortgage premiums. So if your downpayment is just under 10%, 15%, or 20%, it pays to increase the down payment in order to decrease your overall costs.

In Ontario, you will pay 8% provincial sales tax on your CMHC insurance premiums. This fee must be paid at closing.



Scenario #1 in the above table outlines, in simplified terms, how much mortgage Sunil and Brenda can currently qualify for, without taking into consideration their credit scores or other factors. A mortgage pre-approval will establish how much they are eligible to borrow and will help them step into home ownership with confidence.

Since their potential new home might be purchased for more than $500,000, Sunil and Brenda should also understand that CMHC requires a minimum of 10% down on the portion of the purchase above half a million dollars. As shown in the table, they would be required to put down 5% on the first $500,000 of the purchase price and 10% on the remaining $91,000, bringing the minimum down payment to $34,100 (which is $25,000 plus $9,100).

Scenario #2 shows the financial benefits of a larger down payment. Click here to view CMHC's mortgage insurance premium table.

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Susan Williams is a Mortgage Development Manager with National Bank of Canada.
Email: susan.williams@nbc.ca Twitter: @YMJourney

Purchasing a home: 11 fees to keep in mind besides your mortgage

According to Jonathan Haziza, a product manager for mortgage solutions at National Bank, the scale of the costs linked to buying a property tend to be underestimated by first-time buyers.

So without further ado, here are some expenses to keep in mind for a realistic portrait of what lies ahead.

Appraisal fee

Your financial institution may ask for an evaluation of the property’s market worth. This happens when the cost is steep or the property contains various risk factors. Requesting an appraisal is a means of protection: either to ensure that payments won’t be above your means, or to verify that the property is truly worth what you’re about to pay. You’ll therefore need to hire an appraiser to produce the necessary documents.

Inspection fee

Hiring a building inspector to check for hidden defects in pre-existing houses is crucial. This will help you avoid bad surprises that could cost you a lot; you’ll have peace of mind knowing that everything is as it should be.

Legal fee

In Canada, any mortgage deed requires the services of a notary for the province of Quebec and a lawyer for all other provinces. The cost of this transaction varies depending on a number of criteria. Maître Pascale Gagnon, says that: “The type of building, the number of buyers, and the number of separate accommodations, to name only a few, are some of the factors that could
impact the rate. The best way to gauge fees is to directly contact a notary or a lawyer, who will evaluate your case taking into account all of your future residence’s parameters.”

Taxes

As a home owner, here are the five most important taxes you’ll need to keep in mind: Welcome tax, which municipalities apply whenever a property changes hands; Sales taxes if you’re buying a new home; CMHC applicable tax; Municipal tax; School tax. These taxes vary per municipality and according to property value. When preparing your budget, note that municipal and school taxes are recurring and need to be paid year after year, whereas the others only apply once, when you move.

Insurance

If your down payment is smaller than 20% of the cost of your home, you’ll need to take out mortgage insurance. This insurance does not cover your assets, but rather your mortgage payments.

Your financial institution may request that you take out mortgage insurance even if your down payment is bigger than 20% of your property value.

Electricity, television, and Internet connection fees

Electricity connection fees are often forgotten by first-time buyers, as well as fees related to opening new Internet and television accounts. Contact your suppliers to check service availability in your new neighbourhood. If you’re moving into a new development, you may need to pay additional fees to connect your neighbourhood to various networks.

Renovations

Keep some money aside for renovations. Take time to walk through your future dwelling to pinpoint improvements and repairs you’d like to take on.

Furniture and appliances

Your current furniture and appliances might not fit in your new home, or you might simply need to buy more.

Moving costs

Whether you hire professional movers or decide to do everything yourself, you’ll certainly need to take on a few moving-related expenses. Don’t forget to include them in your budget.

Cohabitation fees

If you’re buying a condo, you’ll need to pay cohabitation fees, which include communal expenses such as interior and exterior maintenance, snow removal, etc.

Emergencies

Since it’s impossible to plan for everything, we recommend keeping some money aside for emergencies. National Bank’s Jonathan Haziza’s advice is to set aside at least 2 or 3% of your property value in case anything unexpected happens.

With this list, you can now draw a more accurate portrait of all the expenses associated with purchasing a home.

If you have any questions or would like to learn more about the Home Buyers’ Plan (HBP), don’t hesitate to contact me or make an appointment, I will be happy to help you.

<sub>The contents of this article are provided for information purposes only, and are not comprehensive. They do not create any legal or contractual obligations for National Bank or its affiliates. For information on your financing options, please consult your National Bank real estate specialist.

© 2015 National Bank Canada. All rights reserved. Any reproduction in whole or in part without the prior written consent of National Bank of Canada is strictly prohibited.</sub>

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